Rtc Mortg. Trust 1995-S/N1 v. Sopher

• Decision Date: 25 April 2001
• Docket Number: No. 99 Civ. 1345(WHP).,99 Civ. 1345(WHP).
• Citation: 171 F.Supp.2d 192
• Parties: RTC MORTGAGE TRUST 1995-S/N1, Plaintiff, v. Jacob I. SOPHER and J.I. Sopher Realty, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

Page 192

171 F.Supp.2d 192

RTC MORTGAGE TRUST 1995-S/N1, Plaintiff, v. Jacob I. SOPHER and J.I. Sopher Realty, Inc., Defendants.

No. 99 Civ. 1345(WHP).

United States District Court, S.D. New York.

April 25, 2001.

COPYRIGHT MATERIAL OMITTED

Jeffrey T. Golenbock, Golenbock, Eiseman, Assor & Bell, New York City, for plaintiff.

Samuel Kirschenbaum, Kirschenbaum & Kirschenbaum, P.C., Garden City, NY, for defendants.

DECISION AND ORDER

PAULEY, District Judge.

This is the third in a series of actions brought by plaintiff RTC Mortgage Trust 1995-S/N1, a mortgagee, in connection with four New York City professional condominium units owned by J.I. Sopher & Co. and subject to a mortgage and guaranty executed as security for a debt of $4,200,000. After commencing a foreclosure action and a second action to recover the deficiency, plaintiff brings this diversity action pursuant to the New York Debtor and Creditor Law ("DCL") to declare as fraudulent the 1993 conveyance by J.I. Sopher & Co., Inc. of certain of its assets to a newly-formed company, Sopher Realty. This decision and order sets forth this Court's findings of fact and conclusions of law, as required by Rule 52 of the Federal Rules of Civil Procedure, following a bench trial.

Findings of Fact

Plaintiff RTC Mortgage Trust 1995-S/N1 (the "Trust") is a business trust organized under the laws of the State of the Delaware, with its principal place of business in Bethesda, Maryland. (Joint Pretrial Order dated March 24, 2000 ("JPTO") at 2.) Defendant J.I. Sopher Realty, Inc. ("Sopher Realty") is a corporation organized under the laws of the State of New York, with its principal place of business in New York, New York. (JPTO at 2.) Defendant Jacob I. Sopher ("Sopher"), the sole shareholder of J.I. Sopher & Co., Inc. ("Sopher & Co."), is a citizen of New York. (JPTO at 2; Stipulated Statement of Facts ("Stip.") ¶ (j).) The amount in controversy totals at least $1,889,264.89, the amount of the judgment obtained by the Trust against Sopher & Co. in an earlier action filed in this District.

A. The prior actions and judgments

Sopher & Co. was the mortgagor and Old Stone Bank the original mortgagee on a Mortgage and Security Agreement and Consolidation dated April 23, 1987 (the "Mortgage"). (Stip. ¶ (a).) The Mortgage secured a note in the principal amount of $4,200,000 executed by Sopher & Co. in favor of Old Stone Bank, dated April 23, 1987, and covered four professional condominium units located at 425 East 61st Street, New York, New York (the "Note"). (Stip. ¶ (b).) In connection with the Note and Mortgage, Sopher & Co. executed a Debt Service Guaranty dated April 23, 1987 (the "Guaranty") in which Sopher & Co. "unconditionally guaranteed the prompt payment of all payments of all interest, charges and debt service payable by [Sopher & Co.] under the Note and/or the Mortgage ... and all operating expenses of the mortgaged premises...." (See Stip. ¶ (c).) In May 1992, Sopher & Co. and Old Stone Bank entered into a Loan Modification Agreement extending the maturity date of the Note until April 22, 1997 and reaffirming Sopher & Co.'s obligations under the Guaranty. (Stip. ¶ (d).)

In April 1993, Sopher & Co. failed to make its monthly payment under the Note (Stip. ¶ (e)) and thereafter ceased making future payments (Trial Transcript ("Tr.") at 84; Deposition of Sharon Thomas ("Thomas Dep.") at 26-28). In October 1994, Resolution Trust Corporation ("RTC"), as receiver of Old Stone Bank, filed an action in this District to foreclose on the Mortgage, captioned Resolution Trust Corporation and RTC Mortgage Trust 1995-S/N1 v. J.I. Sopher & Co., 94 Civ. 7189(DC). (Stip. ¶ (f).) During the pendency of the foreclosure action, the Mortgage, Note and Guaranty were sold by RTC to the Trust, which in turn was added as a plaintiff in the foreclosure action. (Stip. ¶ (f).) RTC has a 51% interest in the Trust. (Tr. at 4.) In that action, the district court awarded summary judgment to the plaintiffs and entered a Final Judgment of Foreclosure and Sale dated March 9, 1996, providing in part for the sale of the mortgaged property and affording the Trust the right to commence separate proceedings against Sopher & Co. (or High Rise Realty Co. as it became known) to enforce the Guaranty to the extent the sale of the property resulted in a deficiency. (Stip. ¶ (f); Plaintiff Exhibit ("PX") 45.)

On April 18, 1996, the mortgaged property was auctioned and sold to an affiliate of the Trust for $1,500,000. (Stip. ¶ (g).) In June 1996, pursuant to the judgment in the foreclosure action, the Trust instituted another action in this District, captioned RTC Mortgage Trust 1995-S/N1 v. J.I. Sopher & Co., Inc., 96 Civ. 4992(DC). In this second action, the Trust sought to enforce the Guaranty and recover all unpaid interest, charges, and debt service due under the Note and Mortgage as well as other expenses due. (Stip.¶ (h).) On April 20, 1998, the district court granted summary judgment to the Trust and entered judgment against Sopher & Co. in the amount of $1,889,264.98 (the "Judgment"). (Stip. ¶ (i); PX-46.) Having been unsuccessful in its efforts to satisfy of the Judgment (Tr. at 11), the Trust commenced the present action.

B. The facts underlying this action

In April 1993, Sopher together with his accountant, Stuart Becker, developed a plan to transfer certain of the assets of Sopher & Co. to a newly-formed corporation while retaining as many liabilities as possible, including the Mortgage, in Sopher & Co. (Tr. at 40-42; PX-39; PX-42.) The timing of this plan coincided with Sopher & Co.'s default on its monthly payments under the Mortgage. (See PX-38 at ¶ 17.) In a letter dated April 15, 1993, Sopher wrote to his attorney, with a copy to Becker, inquiring about the consequences of default "on the April and May payments to Old Stone Bank which is now under the auspices of RTC." (PX-40.) Sopher specifically inquired about whether the Trust had to notify Sopher & Co. before drawing on a certificate of deposit that he posted in the event "they find out about [the default]" and whether filing a chapter 11 petition in bankruptcy court would preclude the Trust from doing so. (PX-40.)

On May 18, 1993, Sopher again wrote to his attorney and accountant, informing them that the company was "in default for April and May" as to the condominium units. (PX-39.) Sopher stressed the importance of completing the spinoff promptly before the start of any litigation: "If the spin off is not completed immediately, there will be nothing for Blumenthal [Sopher's attorney] to defend." (PX-39.) Sopher also solicited advice on whether the spinoff could be backdated if it were not completed prior to litigation. He wrote:

If they serve us papers before the spin off, it would appear that it would be too late to consummate same. We have to expect papers at any time. Can we get the spin off finished today? How will it be documented (the date that it was spun off) — so that when papers are served it will be after the spin off?

(PX-39.)

On or about June 17, 1993, approximately six weeks after it ceased making payments on the Note, Sopher & Co. completed the planned corporate reorganization and spinoff. Sopher & Co. changed its name to High Rise Realty Co., Inc. ("High Rise"); formed Sopher Realty, a New York corporation with Sopher as its sole shareholder; and transferred to Sopher Realty all of its property and assets except for the four condominium units, a lease on one of the units, and the New Jersey real estate brokerage business. (Stip. ¶ (j); PX-43; PX-44.) The plan of reorganization recited that Sopher Realty shall not assume "any debts, liabilities, contracts or obligations of High Rise Realty," expressly providing that it "shall not assume any liability under the Mortgage Note dated April 23, 1987." (PX-44.) In exchange for the assets transferred to Sopher Realty, Sopher & Co. (now High Rise) received only stock of Sopher Realty, which immediately was distributed as a dividend to Sopher. (Stip. ¶ (k); Tr. at 77; PX-44.)

Even after the spinoff and transfer of assets, Sopher continued to express to Becker his concern that Sopher & Co. would be sued and wanted to ensure that in such an event there would be no assets for the mortgagee to collect. In particular, on June 21, 1993, Sopher told Becker that he should consult a bankruptcy attorney from a related matter and suggested that his "insight and advice should be incorporated before we formalized the spin off." (PX-42.) Noting that the spinoff was to "leav[e] as much liability as possible" in Sopher & Co., Sopher wanted to ensure "that if we are attacked it will be held in Bankruptcy Court (the liability is left in the corporation etc.)." (PX-42.)

The assets transferred from Sopher & Co. to Sopher Realty in connection with the spinoff had substantial value. Those assets included a loan from Sopher & Co. to Jacob Sopher valued at $1,171,425 as of December 31, 1992 and the goodwill value of the Sopher name, a non-balance sheet item. (Tr. at 70; PX-4; PX-25.) For the year ended December 31, 1993, the year of the spinoff, the Sopher Realty financial statements reflected assets totaling $1,913,331. (PX-29.) Moreover, the business of Sopher Realty continued to generate millions of dollars in revenue. (PX-11; PX-29.) In 1997, the assets of Sopher Realty, excluding the loan to Sopher, were sold to Douglas Elliman for $1,500,000. (Stip. ¶ (1).) Thus, at a minimum, the value of the assets transferred to Sopher Realty as part of the spinoff exceeded $2,600,000 ($1,500,000 plus the loan to Sopher of $1,171,425).

In contrast, the Sopher & Co (High Rise) financial statements for that same period reveal that the company held virtually no assets apart from the condominium units — only $8,262 in cash and an accounting entry relating to mortgage financing costs. (PX-26.) After the spinoff, Sopher & Co. generated no real estate brokerage income. (Thomas Dep. at 84.)

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